(R)evolution of Financial System
By Lukas K on The Capital
Over the past 30 years, as the Internet has attracted more and more users, its involvement in our daily lives has expanded from simple applications such as email to complete immersion in a world o digital-, software- and internet-enabled products. Rather than calling someone to connect us with a driver, we click a button on the Uber app and a car arrives; rather than going to a video store for a hard copy of a movie, we find an abundance of selections on Netflix and YouTube.
These internet- and software-enabled products have dramatically improved the lives of billions of people. They have also altered our expectations regarding the ease and speed with which we can make use of technologies such as smartphone apps to find solutions to the problems that we encounter day to day.
Many firms, in reacting to this evolving environment, have been “going digital” and turning themselves into software-driven enterprises. Even industries originally thought to be inherently tied to physical locations, such as car manufacturing, are picking up on this trend. The best-known example is Tesla. As Marc Andreesen, a founding partner of one of the most prominent VC firms in Silicon Valley, rightly said “Software is eating the world”.
The finance industry is likewise going through a natural “softwarization” of its entire infrastructure. The distribution, accessibility, and user experience of a few banking products have led the way, including such current successful fintech products as Revolut, N26, Venmo, and Robinhood. Leveraging the Internet, software, and smartphones, these products have fundamentally changed the distribution of banking services, allowing for improved accessibility, and allowed firms to create better user experiences. Now, there is no need to go to a bank branch to open an account or buy stocks; you can carry out transactions like these with a few clicks in a few minutes on a smartphone.
Nevertheless, the backend regarding how and where these banking products are “manufactured” remains the same. That is, all of these “neobanks” rely on the same old infrastructure that brick-and-mortar banks have relied on for generations, one that is fragmented, not easily accessible, slow, costly to run, and heavily dependent on manual and human processes. The emerging internet finance marketplace, in other words, has been like an old car with a new paint job.
All of this is about to change thanks to another wave of new technologies. Of particular importance in this regard has been the development of blockchain-enabled decentralized finance (DeFi) products. DeFi enabled products, which, while still in its infancy, already has over $700m in circulation — a 10-fold increase in just 2 years.
Simply put, DeFi refers to a category of financial products, such as borrowing, lending, and stock purchasing, that are being developed to make use of automated computer programs. Anyone anywhere in the world with an internet connection can access these products, with no need to visit a physical location, wait while transactions are processed, pay exorbitant mediation fees, or rely on intermediaries to assure delivery. This code-based financial technology is comparable to YouTube, which makes it possible for just about anyone with an internet connection to post and watch videos.
One of the most popular of these DeFi financial applications is Compound, which enables automated pools of borrowing and lending with interest. Imagine a regular savings account, where everything is controlled by automated computer programs. Since there is no bank or another intermediary, the fees are low and the interest rates for lending can be many times the industry average — all without any fixed terms, so you can withdraw funds or pay back a loan at your convenience.
The average user may still find accessing these products somewhat complicated, but several companies are building applications to bring them to a mass audience. We at Voluto, for example, are creating a product that functions like a savings account and makes it possible to earn 4–6% interest on your cash with no lock-up periods. Compared with the industry average yield of 0.05%, a Voluto account gives a 100-fold better return on its users’ money. And we are only able to provide this service thanks to Compound.
The future of banking belongs to automated financial applications. Soon, sprawling physical locations staffed by thousands will be replaced by code-based automated systems that reach around the world to provide financial services more cheaply and efficiently than ever before. The trend is unmistakable. I invite you to be a part of it.
